Problem 3A-5 (60 minutes)
1. The company’s estimated direct labor-hours can be computed as fol-
lows:
Deluxe model: 5,000 units × 2 DLHs per unit …..
10,000 DLHs
Regular model: 40,000 units × 1 DLH per unit …
40,000 DLHs
Total direct labor hours ………………………………
50,000 DLHs
Deluxe
Regular
Direct materials ……………………
$40
$25
Direct labor …………………………
14
7
Manufacturing overhead:
$18 per DLH × 2 DLHs ………..
36
$18 per DLH × 1 DLH …………
18
Total unit product cost …………..
$90
$50
2. Predetermined overhead rates are computed below:
Activity Cost Pool
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasing …………….
600 purchase
orders
$340 per purchase
order
Processing …………….
35,000 machine-
hours
$5.20 per
machine-hour
Scrap/rework …………
2,000 orders
$189.50 per order
Shipping ……………….
900 shipments
$150 per shipment
Problem 3A-5 (continued)
b. Using activity-based absorption costing, the unit product cost of each
4. Unit costs appear to be distorted as a result of using direct labor-hours
as the base for assigning overhead cost to products. Although the
deluxe model requires twice as much labor time as the regular model, it
still is not being assigned enough overhead cost, as shown in the analy–
Case 3A-6 (continued)
Before we can determine the amount of overhead cost to assign to
the products we must first determine the activity for each of the
products in the six activity centers. The necessary computations fol-
low:
Number of purchase orders:
Kenya Dark: 80,000 pounds ÷ 20,000 pounds per order = 4 orders
Viet Select: 4,000 pounds ÷ 500 pounds per order = 8 orders
Number of setups:
Kenya Dark: 16 batches × 2 setups per batch = 32 setups
Viet Select: 8 batches × 2 setups per batch = 16 setups
Number of batches:
Kenya Dark: 80,000 pounds ÷ 5,000 pounds per batch = 16 batches
Viet Select: 4,000 pounds ÷ 500 pounds per batch = 8 batches
Roasting hours:
Kenya Dark: 1.5 hours × (80,000 pounds ÷ 100 pounds) = 1,200
hours
Viet Select: 1.5 hours × (4,000 pounds ÷ 100 pounds) = 60 hours
Blending hours:
Kenya Dark: 0.5 hour × (80,000 pounds ÷ 100 pounds) = 400 hours
Viet Select: 0.5 hour × (4,000 pounds ÷ 100 pounds) = 20 hours
Packaging hours:
Kenya Dark: 0.3 hour × (80,000 pounds ÷ 100 pounds) = 240 hours
Viet Select: 0.3 hour × (4,000 pounds ÷ 100 pounds) = 12 hours
Case 3A-6 (continued)
b. According to the activity-based absorption costing system, the manu-
facturing overhead cost per pound is:
Kenya
Dark
Viet
Select
Total overhead cost assigned (above) (a) …
$26,976
$7,608
Number of pounds manufactured (b) ……….
80,000
4,000
Cost per pound (a) ÷ (b) ………………………
$0.34
$1.90
c. The unit product costs according to the activity-based absorption
costing system are:
Kenya
Dark
Viet
Select
Direct materials (given) ………..
$4.50
$2.90
Direct labor (given) ……………..
0.24
0.24
Manufacturing overhead ……….
0.34
1.90
Total unit product cost ………….
$5.08
$5.04
3. MEMO TO THE PRESIDENT: Analysis of JSI’s data shows that several
activities other than direct labor drive the company’s manufacturing
overhead costs. These activities include purchase orders issued, number
of setups for material processing, and number of batches processed.
Appendix 3B
The Predetermined Overhead Rate
and Capacity
Exercise 3B-1 (20 minutes)
1. There were no beginning or ending inventories, so all of the jobs were
started, finished, and sold during the month. Therefore cost of goods
sold equals the total manufacturing cost. We can verify that by compu-
ting the cost of goods sold as shown below:
Manufacturing costs charged to jobs:
Direct materials …………………………………….
$ 5,350
Direct labor (all variable) …………………………
8,860
Manufacturing overhead applied
(150 hours × $82 hour) ………………………..
12,300
Total manufacturing cost charged to jobs ……..
26,510
Add: Beginning work in process inventory ……..
0
26,510
Deduct: Ending work in process inventory …….
0
Cost of goods manufactured ………………………
$26,510
Beginning finished goods inventory ……………..
$ 0
Add: Cost of goods manufactured ……………….
26,510
Goods available for sale …………………………….
26,510
Deduct: Ending finished goods inventory ………
0
Cost of goods sold ……………………………………
$26,510
At the end of the month, overhead was underapplied by $1,920 as
shown below:
Manufacturing overhead incurred …………………………..
$14,220
Manufacturing overhead applied
(150 hours × $82 hour) ……………………………..……………
12,300
Overhead underapplied………………………………………………
$ 1,920